AB Dynamics raises full-year expectations

Shares in AB Dynamics (ABDP) edged up after the automotive testing group fleshed out details from its late-February trading update. The main takeaway is that adjusted operating profits will be ahead of current expectations. Half-year profits came in at £8.9mn from £7.7mn last time around.

The related margin improved by 110 basis points to 17 per cent, reflecting “increased levels of activity” and the benefits of “enhanced performance initiatives”, even though profitability was constrained to the tune of 160 basis points by further investments in ABD Solutions. The positive news on margins is doubly impressive given inflationary cost pressures, but internal efficiencies are also reflected in a cash conversion rate of 107 per cent and operating cash generation of £11.3mn, against £9.5mn at the 2023 interim mark.

On a segmental basis, sales growth in testing products/services was partially offset by a reduction in simulator revenue. The group indicated that simulator contracts are weighted towards the second half, although it doesn’t pay to place too much weight on comments linked to revenue recognition, especially given that comparisons are slightly skewed due to the duration of Covid-linked disruption in China.

Ostensibly, the investment case is supported by growth drivers linked to active safety technologies and autonomous systems, and the spread of electric vehicle mandates, yet it’s difficult to remember a time when the wider automotive industry was as financially vulnerable due to regulatory intervention. Nonetheless, near-term prospects have trumped earlier expectations courtesy of improved order visibility and strong trading momentum as AB Dynamics entered the second half. The group trades at 30 times Peel Hunt’s projected fully diluted earnings per share (EPS) of 61.1p. That’s roughly in line with the mid-point average rate, so we return to hold.

Last IC view: Buy, 1,718p, 25 Jan 2024